Kaiser Foundation Health Plan Inc. and its Colorado affiliate have filed suit in California federal court against nine major insurers — led by AIG and Chubb — seeking up to $95 million in directors and officers liability coverage to reimburse a recently settled $556 million whistleblower fraud case accusing Kaiser of submitting invalid diagnoses to inflate Medicare Advantage payments.

In the 14-page complaint filed Friday, Kaiser alleges the insurers breached their policies by refusing to indemnify the healthcare giant for the bulk of the settlement and capping defense cost reimbursement at just $1 million under a disputed governmental funding sublimit.

The underlying qui tam action, consolidated from whistleblower suits filed in 2013–2014 by former Kaiser coder Ronda Osinek and physician Dr. James Taylor, accused Kaiser health plans and medical groups of systematically pressuring physicians to add diagnoses not addressed or supported in patient visit notes — boosting risk-adjustment scores and triggering higher Medicare payments from the government.

After the U.S. Department of Justice intervened in 2021, five Kaiser Permanente affiliates agreed last month to pay $556 million to resolve the False Claims Act allegations. The DOJ emphasized the settlement resolved only claims (no liability admission), with relators receiving a $95 million share matching the exact D&O coverage tower Kaiser now seeks to tap.

Kaiser claims its primary D&O policy from National Union Fire (AIG) provides $10 million in coverage above a $10 million self-insured retention for "wrongful acts" like those alleged in the qui tam case. Eight excess/follow-form policies (from Chubb, Berkley, Starr, National Fire, RSUI, Markel, Fair American, and Allianz) layer on another $85 million, totaling $95 million available for defense and indemnity.

According to the suit, AIG acknowledged the qui tam action as a covered claim and that defense costs satisfied the retention — yet refused to pay beyond $1 million, citing a "Governmental Funding Defense Cost Coverage" sublimit allegedly capping costs tied to government fund return claims. Excess insurers followed suit, denying further defense reimbursement and refusing indemnity for the settlement (including any multiplied damages component).

Kaiser counters that the exclusion applies only to "return of funds" (repaid overpayments), not multiplied damages or penalties — which cannot constitute returned government money Kaiser never legitimately received. The complaint argues no insurer has justified denying indemnity for these non-repayment portions.

The suit seeks breach of contract damages, declaratory relief confirming full coverage obligations, policy benefits, interest, and costs.

This insurance coverage battle underscores tensions in D&O policies when defending against high-stakes FCA healthcare fraud settlements — where carriers often invoke exclusions/sublimits to limit exposure on massive resolutions funded by taxpayer dollars.